The merger between decentralized finance (DeFi) and traditional assets has been held back by the lack of infrastructure and regulatory standards worldwide, according to sources Cointelegraph recently spoke with.
“There’s no good institutional-grade system for these companies to participate in. Obviously, they’re not going to just run the whole system using regular blockchain wallets and centralized exchanges,” said Colin Butler, global head of institutional at Polygon.
Tokenization is the path to fractionalization, allowing some people to own a part of an asset that previously had to be sold as a whole for a higher value. Big Four firm PwC predicts that global assets under management will reach $145.4 trillion by 2025, a large market that is expected to welcome more investors and, thus, increase the liquidity of assets through tokenization.
Institutional investors – who manage this capital around the world – are looking for “a service that works well with what they’re already doing, that’s easy to implement, flexible and renewable,” Butler said.
Polygon says it has partnered with many of these global players. In January, investment firm Hamilton Lane announced the first of three token funds backed by Polygon, bringing a portion of the $824 billion in assets under management to the chain. By underwriting its flagship Equity Opportunity Fund, Hamilton Lane was able to lower the minimum investment required from an average of $5 million to $20,000.
We are pleased to share that a portion of our recently closed Equity Opportunities Fund V is now accessible to qualified investors through @Securitize the tokenized feeder fund @0xPolygon. Learn more: https://t.co/ZxfaNJwgBx pic.twitter.com/4SOezI2Ma2
— Hamilton Lane (@hamilton_lane) January 31, 2023
Another example is JPMorgan. In November, the American giant executed the first cross-border DeFi transaction on a public blockchain. The initiative is part of a pilot program exploring the potential of DeFi for the wholesale funding market. Trading is also done on the Polygon network.
Despite recent progress in integrating DeFi into traditional markets, a lack of regulatory clarity remains to prevent the adoption of the emerging technology. One main question on this topic is: What are the securities? The United States Securities and Exchange Commission has confirmed through enforcement actions that the definition can be applied to a wider variety of assets and services than crypto companies want. As Butler asks:
“If you sign a security, is the digital token a security in itself, or does it just represent one?”
Jez Mohideen, co-founder and CEO of Laser Digital – the crypto arm of the Japanese banking giant Nomura – believes that the lack of regulation affects the risk management of digital assets, because it prevents companies from effectively separating units and business models.
“More regulations are needed in certain business segments – for example, making capital protected by individuals who have fiduciary responsibilities. As more and more regulatory enforcement of this nature comes into play, there will be an increase in the amount of institutional interest,” he told Cointelegraph.